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Working with Brokers and Investment Advisers

Used with permission from The United States Securities and Exchange Commission.

Are you the type of person who will read as much as possible about potential investments and ask questions about them? If so, maybe you don’t need investment advice.

But if you’re busy with your job, your children, or other responsibilities, or feel you don’t know enough about investing on your own, then you may need some help.

Brokers and investment advisers offer a variety of services at a variety of prices. It pays to comparison shop.

You can get investment advice from most financial institutions that sell investments, including brokerages, banks, mutual fund companies, and insurance companies. You can also hire a broker, an investment adviser, an accountant, or a financial planner to help you make investment decisions.

There is no such thing as a free lunch. Investment advisers and brokers do not perform their services as an act of charity. If they are working for you, they are getting paid for their efforts. Some of their fees are easier to see immediately than are others. But, in all cases, you should always feel free to ask questions about how and how much your adviser is being paid. And if the fee is quoted to you as a percentage, make sure that you understand what that translates to in dollars.

Tricky Titles

If a broker or adviser has initials after his name, don’t assume that makes that individual better qualified than another. These titles are not all the same and do not necessarily mean better service for you. In fact, the initials may mean that the adviser or broker can only sell certain products. Check the titles to see if there are limits on what that adviser or broker can sell. For instance, if someone can only sell fixed annuities, he or she may be inclined to recommend them for every customer.

Must Read Tip

If you have a brokerage account, read your statement every month -- it may not be fun to look at it when the market is down, but it is your most important protection against unauthorized transactions. If you do not object in writing within ten days of receiving notification of a transaction, you might not be able to contest it later. That’s why it’s important to read your statement and object right away if something is wrong.

Brokers

Brokers execute trades for customers and are generally paid commissions when you buy or sell securities through them. Brokers may make recommendations about specific investments such as stocks, bonds, or mutual funds. If a broker sells you mutual funds, make sure to ask questions about what fees you will be charged for the purchase.

Brokerage firms vary widely in the quantity and quality of services they provide for customers. Some have large research staffs and large national operations, and are prepared to service almost any kind of financial transaction you may need. Others are small and may specialize in promoting investments in unproven and very risky companies. And there’s everything else in between.

A discount brokerage charges lower fees and commissions for its services than what you’d pay at a full-service brokerage. But generally you have to research and choose investments by yourself.

A full-service brokerage costs more, but the higher fees and commissions pay for a broker’s investment advice based on that firm’s research.

You’ll want to find out if a broker is properly licensed in your state and if the broker or firm has had run-ins with regulators or received serious complaints from investors. You’ll also want to know about the broker’s educational background, and where he or she worked previously. Using BrokerCheck, you can search for a brokerage firm or individual broker. Your state securities regulator may provide more information, so you may want to check with them also.

The Securities Investor Protection Corporation (SIPC) may protect you if a brokerage firm goes bankrupt or if your securities are stolen. You should check whether your brokerage firm has this important coverage. SIPC does not protect you against declines in your investment holdings.

Using BrokerCheck

Details on a broker’s background and qualifications are available for free on FINRA’s BrokerCheck website.

Using BrokerCheck, you can search for a brokerage firm or individual broker by name or registration number, and link to state regulators’ websites.

For individual brokers, BrokerCheck will tell you:

  • Where the broker works currently
  • The broker’s employment history for the past 10 years, in and outside the brokerage industry
  • What licenses the broker holds and where the broker is registered
  • The qualification exams the broker has passed

 

BrokerCheck also will tell you whether the broker has been:

  • Charged or convicted of any criminal felonies
  • Charged or convicted of any investment-related misdemeanors
  • Subject to any industry disciplinary actions or investigations by regulators
  • Involved in any investment-related civil actions or proceedings
  • Named in any consumer-initiated complaints, arbitration proceedings, or civil law suits
  • Cited for failing to pay judgments or liens
  • In bankruptcy proceedings
  • Terminated by an employer following allegations of misconduct or failing to supervise subordinates.

 

FINRA Disciplinary Actions Online

In addition to BrokerCheck, FINRA has a separate database for viewing FINRA’s disciplinary actions against brokers.

You can search for cases and actions back to 2006 that are eligible for publication pursuant FINRA Rule 8313 (Release of Disciplinary Complaints, Decisions and Other Information). You can search the FINRA Disciplinary Actions Online by individual name, firm name, case number, date range, document type, document text, or CRD number. Results will include opinions issued by the SEC and federal appellate courts that relate to FINRA disciplinary actions that have been appealed.

Investment Advisers

What is an investment adviser?

Generally, investment advisers are individuals or firms that receive compensation for giving advice on investing in stocks, bonds, mutual funds, or exchange traded funds. Some investment advisers manage portfolios of securities.

What is the difference between an investment adviser and a financial planner?

Some financial planners are investment advisers, but not all investment advisers are financial planners. Some financial planners assess every aspect of your financial life -- including saving, investments, insurance, taxes, retirement, and estate planning -- and help you develop a detailed strategy or financial plan for meeting all your financial goals.

Others call themselves financial planners, but they may only be able to recommend that you invest in a narrow range of products, and sometimes products that aren't securities.

Before you hire any investment adviser, you should know exactly what services you need, what services the adviser can deliver, any limitations on what they can recommend, what services you're paying for, how much those services cost, and how the adviser or planner gets paid.

What questions should I ask when choosing an investment adviser or financial planner?

Here are some of the questions you should ask when hiring an investment adviser:

  • What experience do you have, especially with people in my circumstances?
  • Where did you go to school? What is your recent employment history?
  • What licenses do you hold? Are you registered with the SEC, a state, or the Financial Industry Regulatory Authority (FINRA)?
  • What products and services do you offer?
  • Can you recommend only a limited number of products or services to me? If so, why?
  • How are you paid for your services? What is your usual hourly rate, flat fee, or commission?
  • Have you ever been disciplined by any regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
  • For registered investment advisers: will you send me a copy of both parts of your Form ADV?

Using IAPD

The IAPD Program provides information about investment adviser firms registered with the SEC and most state-registered investment adviser firms. The SEC typically regulates larger investment advisers while smaller investment advisers generally are regulated by the states.

Through IAPD, you can:

  • Search for an investment adviser firm
  • View the adviser’s current Form ADV filing
  • Check the adviser’s registration status
  • Search for an investment adviser representative
  • View information on the representative’s professional background and conduct
  • Check the representative’s registration status
  • Link to a state regulator’s website
  • Link to the FINRA BrokerCheck website for information about broker-dealers and stockbrokers